Long-Run Relationship between Oil Price and Macroeconomic Indicators using Johansen Co-integration Test: A Case of Pakistan

Abstract

This paper aims to analyze the co-integration among the Oil Prices, KSE-100 Index, Consumer Price Index and the Exchange Rate (US-Dollar) in the context of Pakistani Economy and in order to accomplish the objectives the Augmented Dickey Fuller (ADF) test is used to check the stationary of data that we achieve at first difference and then Johansen Co-Integration Test is applied to identify the association among these variables and according to both Trace Statistic and Max-Eigenvalue Statistic criteria we have identified that there is at most one co-integrated equation among these variables i.e. Oil Prices, KSE-100 Index, CPI and the value of US-Dollar against PKR have a no long-term association. This research has a great contribution in the literature as well as may prove beneficial for the individual and institutional investors who trade in the stock and forex market.